Lehman Shines but Advisory Drop Hurts Goldman

Two of Wall Street’s major investment banking names reported second-quarter earnings Tuesday, displaying starkly different report cards.

Though market volatility clearly continues to plague the bottom line at the investment banks, Lehman Brothers, playing on its strength in debt markets, surprised some observers by reporting a 14% jump in profits, to $430 million for the quarter, or $1.38 per diluted share, 24 cents above analyst expectations.

Goldman Sachs Group, meanwhile, saw profits decline 24%, as revenues from investment banking advisory fees sank 50% from the same period last year. Goldman, however, reported profits of $1.06 per diluted share, meeting analyst predictions. Both companies’ fiscal quarters ended May 31.

In a conference call Tuesday morning, David Goldfarb, Lehman’s chief financial officer, proudly told analysts, “We had our third-best quarter ever, which is quite an achievement in this difficult market environment.”

Mr. Goldfarb attributed the positive results in part to an increase in Lehman’s fixed income business, where the company earned $265 million, which he said was “more than double” that earned in the same period last year. Fixed income fees were also up 45% over the first quarter, Mr. Goldfarb said.

A confluence of factors contributed to what was essentially “a perfect time to issue high-grade debt,” he said. The Federal Reserve’s current rate reduction policy and the steepening of the yield curve all helped, he said. “We saw this coming; we knew some of our clients had to restructure their balance sheets.”

David A. Viniar, Goldman Sachs’ chief financial officer, also talked of tough market conditions, though the effect on Goldman’s bottom line was a negative one.

“The operating environment for investment banking remains challenging,” Mr. Viniar said. “We are quite cautious about the near term outlook, and though our deal pipeline is growing, we are now entering the summer months where our business slows down,” he told analysts on a conference call Tuesday morning.

However, Mr. Viniar said that Goldman remains optimistic about the business going forward. Asked by one analyst whether Goldman feels under pressure to rent out its balance sheet to woo corporate clients while the deal market remains lackluster, Mr. Viniar firmly answered no.

“We use our balance sheet to support our clients when we think it is prudent to do so, and our clients continue to award the transaction based on the quality of the transactions and the quality of the execution,” he said.

Meanwhile, both Mr. Goldfarb and Mr. Viniar talked of growth potential in Europe.

Some 27% of Lehman’s revenues in the second quarter came from the European continent, Mr. Goldfarb said. “Europe offers the most growth opportunities for the business going forward,” he said.

Mr. Viniar said that though things had slowed, “We continue to believe that our business in Europe will grow faster than in the U.S. — and than anywhere else.”

The results from both companies were solid considering the tough environment, said Henry McVey, an equity analyst with Morgan Stanley Dean Witter & Co.

“Lehman made a bet on moving from cost containment toward revenue growth and that’s paying dividends, even in a tough market,” Mr. McVey said.

“Goldman has had much more exposure to the mergers and acquisition cycle and they’re really feeling the pinch,” he added.

However, “both of these firms reported a respectable return on equity,” Mr. McVey said.